"I'm frequently asked if I'm more concerned today than I was in 2005. There are reasons for concern: the credit markets have seized up, many financial institutions are insolvent, consumer spending and investment in commercial real estate is starting to decline, export growth appears to be slowing, the unemployment rate is rising … and the economy is clearly in a recession. There are huge and scary downside risks today, but I'm actually more sanguine now than I was in 2005. If you think back to 2005, we were standing at the precipice, and there was no where to go but over the cliff.
Housing starts have collapsed by more than half since 2005. This decline seemed obvious and inevitable in 2005, and now most of the adjustment has already happened. Which was better for the economy looking forward? To be standing at the edge (in 2005) or to be much nearer the bottom in 2008?
Just like for housing starts, new home sales have collapsed by more than half since 2005. The good news is starts of single family homes built for sale have fallen below new home sales, and new home inventory is declining (although existing home inventory is still near record levels). Once again the bulk of the adjustment is now behind us.
(House price / income ratios are back to 2003 levels.) Although I believe there are more price declines ahead (and therefore more homeowners with negative equity and more foreclosures), prices are much more reasonable today than in 2005.
The price adjustments were inevitable, and progress is being made."